When Level 3 Communications (LVLT) entered into a definitive agreement under which the company would acquire Global Crossing in a tax-free, stock-for-stock transaction on April 11, 2011, expectations were high. The stock jumped 18% to a split adjusted $25.5 on the announcement. The stock went on to touch $40.00 in July.
LVLT has been bleeding cash throughout its entire history (see below), accumulated massive debt (over $8 billion today) and has not been able to grow the top line organically. The acquisition sparked hopes that LVLT would now have enough mass to turn things around and kick start top line growth. Past acquisitions have proved problematic but this time would be different.
LVLT completed the acquisition of Global Crossing on October 4, 2011, and announced plans to transfer the listing of its common stock to the New York Stock Exchange, which occurred on October 20. In conjunction with listing on NYSE, the company affected a 1-for-15 reverse stock split of the Level 3 common stock. Many read good news into this- after all, why do a reverse stock split unless something was in the offering? Was accelerated revenue growth about to be part of the story? It turns out LVLT had no choice if they wanted to be listed on the NYSE. A complete explanation can be found here.
On November 18, 2011 the stock closed at $19.33, down 51% from the July high and 11% below the price the day before the acquisition was announced extinguishing the sparks the acquisition generated. Why?
On November 2, LVLT released their Q3 earnings. I think many were disappointed for the following reasons.
- LVLT made no attempt to present complete pro-forma numbers.
- Global Crossing data points were given, not a complete set of financials.
- No new guidance the combined entity will generate more than single digit top line growth.
- No positive financial news that justified the reverse stock split.
- Free cash flow and EBITDA guidance insinuates low top line growth.
The best assessment of top line growth that management has given to date is about 8%. Yes, that should be good enough for the company to survive and service the debt as long as liquidity does not dry up. If this is the longer term growth rate many will be disappointed as is reflected in the market today.
Should a change be made if performance cannot be improved? The CEO has been at the helm since the inception of LVLT. The Board seems very satisfied with the performance to date, given the compensation history. The CEO‘s compensation from 2004 through 2010 (2011 is not known as of this date) is approximately $29 million. A complete breakdown is provided here. Should a leadership change be made if revenue growth does not improve or are large 2011 bonuses in the offering? You decide.
The stock will probably trade in the high teens to low twenties until additional visibility is provided. When will more visibility be provided? CFO Sunit Patel said the following on the Q3 conference call:
…we will provide a business outlook for 2012 for the combined business when we announce our fourth quarter results.
Disclosure: I am long LVLT.